Many people are surprised to learn they are going to be paying more tax this year. This is thanks to the recent tax law changes, the Tax Cuts and Jobs Act, that was put into law by the Republican majority effective January 1, 2018. In no certain terms was it obvious what the full impact would be until tax time as this was the most significant change to the tax code in decades.
The biggest reason for the increase in tax due is the cap on deductions at $10,000. If you live in California, New York, or another state with high state and local income tax, you would feel the pain more than others as those taxes are no longer fully deductible.
The new tax rules also eliminated other deductions that people are used to taking, such as alimony payments, moving expenses, tax preparation fees, investment fees, and unreimbursed employee expenses. Note that some of these deductions, such as investment fees, may still be available as a state income tax deduction.*
With the standard deduction doubling to $24,000 per married couple, your charitable giving must generally be higher than this amount in order to take advantage of any tax benefit, unless you’re already itemizing.
It's clear that these tax changes punishes W2 earners in the coastal states. Fortunately, there are some things you can do to improve your tax situation. If you are used to deducting employee expenses, it may be worth negotiating with your employer to adjust your salary to compensate for the loss, as employers and Schedule C filers can still take the deduction. Independent contractors may also benefit from 20% qualified business income deduction which is available if you meet certain conditions.
There are various strategies to keep your tax bill low going forward. Contribute to your workplace retirement plan, such as a 401(k) plan, for the full amount of $19,000/year, plus $6,000 “catch-up” for people 50+. Health Savings account contributions are deductible with $3,500 per person limits, plus $1,000 for people 55+. Long-term care premiums may be deductible and state municipal bond interest is both federal and state tax-free.
At Eureka Wealth Management, I coordinate tax strategies with your tax advisor and help you implement in order to receive the greatest possible benefit. I also do retirement income and estate strategies. Call for a free initial consultation at (760) 537-0791 or online at eurekawealthmanagement.com. *For tax questions, consult your tax advisor.